United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT February 14, 2006
Charles R. Fulbruge III
Clerk
No. 04-11300
FINANCIAL ACQUISITION PARTNERS LP, on behalf of themselves and
all others similarly situated; JOHN D. MAY, on behalf of
themselves and all others similarly situated,
Plaintiffs-Appellants,
versus
L. KEITH BLACKWELL; JONATHAN S. PETTEE; RANDOLPH E. BROWN; RON B.
KIRKLAND; DELOITTE & TOUCHE LLP, a Delaware Limited Liability
Partnership,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Texas
Before JOLLY, BEAM,* and BARKSDALE, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:
In this putative class action for securities fraud, Financial
Acquisition Partners and John D. May (Plaintiffs) appeal the
Federal Rule of Civil Procedure 12(b)(6) dismissal of their second
amended complaint pursuant to the Private Securities Litigation
Reform Act (PSLRA), 15 U.S.C. § 78u-4. Plaintiffs’ claims arise
from their purchase of shares, and the bankruptcy shortly
thereafter, of Amresco Inc. Plaintiffs challenge the district
*
Senior Circuit Judge, United States Court of Appeals for the
Eighth Circuit, sitting by designation.
court’s: (1) holding implicitly that collateral estoppel did not
preclude the individual defendants’ raising certain defenses; (2)
striking opinions from an expert’s affidavit attached to the
complaint; (3) holding Plaintiffs failed to satisfy the PSLRA’s
pleading requirements; and (4) denying leave to amend their
complaint. AFFIRMED.
I.
The following factual recitation is based on the complaint at
issue and public filings, all of which may be considered in
deciding a Rule 12(b)(6) motion, as discussed infra.
Amresco was publicly traded. As a debtor in bankruptcy when
this action was initiated, it was subject to the automatic stay
provisions. 11 U.S.C. § 362.
Defendants L. Keith Blackwell, Jonathan Pettee, Randolph E.
Brown, and Ron B. Kirkland (Individual Defendants) are former
officers and directors of Amresco. Brown was chairman of the board
and CEO from November 2000 until Amresco’s bankruptcy filing;
Blackwell, its general counsel and president; Pettee, its chief
financial officer; and Kirkland, its senior vice president and
chief accounting officer. Defendant Deloitte & Touche LLP was
Amresco’s auditor.
Prior to its 2 July 2001 bankruptcy filing, Amresco was a
small and middle–market lending company with three main segments:
commercial finance, asset management, and home equity lending. Its
2
operations centered around its commercial finance line of business.
Commercial finance revenues were primarily earned from (1) interest
and fees on loans to small and middle–market business owners; (2)
accrued earnings on retained interests in securitizations; (3)
servicing fees on its loan portfolios; and (4) gains on the
securitization on sale of loans.
One of Amresco's significant divisions was a lender to
restaurants (including well-known national chains) and other small
to middle–market businesses. Amresco funded these loans through a
warehouse financing facility (revolving credit line) before
bundling them for sale to a third party. These bundled loans were
securitized - sold into a trust and then bonds backed by underlying
trust loans issued. Amresco retained an interest in the
securitized loans. Borrowers signed a note for an amount 5 to 10%
greater than the amount loaned and paid interest on that greater
amount (credit enhancement). The credit enhancement also served as
collateral for the loan; but, of course, if net losses in the
securitization pool exceeded 10%, Amresco's cash flow would
decrease. The premium was returned to borrowers if there were no
deficiencies within the pool; otherwise, they forfeited those
payments. If the loans became more than 105 to 360 days delinquent
(depending on the loan), payments to investors were accelerated;
Amresco's cash flow would decrease; and it would have to write-down
some of its subordinated interests.
3
Because the anticipated payments on the retained interests
extended into the future, Amresco had to estimate, and report on
its financial statements, the present fair value of those payment
streams. The Form 10-K for the year 2000 (Y2000 10-K), signed on
30 March 2001 and filed on 2 April, noted that different
assumptions might materially affect the estimates.
Two key assumptions in that Y2000 10-K were the projected
credit loss and the discount. Amresco believed net losses would
not exceed the credit enhancement range, so that borrowers would
absorb the entire loss. Therefore, it estimated a net credit loss
of zero percent. Amresco stated that a 1.5% credit loss increase
would reduce the value of Amresco's retained interest by $27
million.
Amresco's Y2000 10-K, accompanied by Deloitte's audit,
reported assets of $715 million and shareholders' equity of $165
million. It also showed Amresco suffered losses of $69 million in
1998, $221 million in 1999, and $218 million in 2000. The Y2000
10-K stated Amresco no longer had access to its prior warehouse
financing. Therefore, Amresco needed to find a new lender; but,
the Y2000 10-K stated a new lender was not guaranteed and that,
until one was found, Amresco's ability to make new loans was
substantially impaired.
This action concerns shares of Amresco purchased from 29 March
2001 to 2 July 2001 by a claimed class. (Again, the Y2000 10-K
4
primarily at issue was signed on 30 March 2001 and filed on 2
April.) Plaintiffs claim fraud relating to (1) Amresco's financial
statements; (2) statements its officers made to certain
shareholders; and (3) other omissions. The allegations primarily
involve the following events: (1) in April 2000, Amresco agreed to
a material executive compensation plan for its officers, including
the Individual Defendants, that should have been, but was not,
disclosed immediately to the public; (2) on 12 March 2001, Amresco
retained Greenhill & Co. to explore restructuring options,
including, but not limited to, bankruptcy; (3) on 2 April 2001,
Amresco filed its Y2000 10-K, signed by Brown, Pettee, and Kirkland
(Plaintiffs allege numerous material misstatements and omissions
related to this filing, including Amresco's not disclosing the
potential for default, and eventually the default, of a $50 million
loan to Duke & Long); and (4) on 10 May 2001, Brown, Pettee, and
Blackwell met with shareholders in Oklahoma, allegedly telling them
Amresco would obtain new warehouse financing. (These alleged
statements were the subject of another action, discussed infra,
Prescott Group Aggressive Small Cap, L.P. v. Blackwell, et al., No.
02-CV-0517-EA (M) (N.D. Okla. 25 Aug. 2003) (unpublished).)
Plaintiffs’ complaint was filed in mid–2002. Approximately
six months later, by joint motion, Plaintiffs declared their
intention to file an amended complaint and Defendants agreed to
5
delay moving to dismiss until that complaint was filed. The motion
was granted.
The first amended complaint was filed in early 2003. After
Defendants moved to dismiss, Plaintiffs filed an opposed motion for
leave to amend (to file the second amended complaint at issue). In
July 2003, in granting leave to amend, the district court
cautioned: additional amendment “[would] not be granted absent
extraordinary circumstances”. Fin. Acquisition Partners, L.P. v.
Blackwell, No. 3:02-CV-1586-K (N.D. Tex. 28 July 2003)
(unpublished).
Accordingly, that month, Plaintiffs filed their second amended
complaint (SAC); Defendants moved to dismiss, including Deloitte’s
moving to strike Plaintiffs’ expert’s affidavit attached to the
SAC. Responding in opposition to the motions to dismiss,
Plaintiffs, inter alia, urged application of collateral estoppel,
from the above-referenced Oklahoma Prescott litigation, to certain
matters in dispute. In a detailed and comprehensive opinion that
exceeded the 50–page SAC by only a few pages, the district court
granted, in part, Deloitte’s motion to strike; granted the motions
to dismiss; and denied leave to amend the SAC (to file a fourth
complaint).
II.
Plaintiffs contest the district court’s: (1) implicitly
denying application of collateral estoppel; (2) striking part of
6
their expert’s affidavit; (3) holding the SAC failed to satisfy the
PSLRA’s pleading requirements; and (4) denying leave to amend the
SAC.
A.
In the Prescott litigation, plaintiffs alleged Blackwell,
Brown, Kirkland, and Pettee made misstatements in May 2001 (post-
filing of the Y2000 10-K that April) in connection with their
incentive compensation arrangements, Amresco’s ability to obtain a
warehouse line of credit, and the impairment of the Duke & Long
loan. That action was settled, but only after denial of the
Individual Defendants’ motion to dismiss regarding the compensation
and Duke & Long claims. Plaintiffs maintain such denial in
Prescott provides collateral estoppel for those claims in this
action.
The SAC was filed in July 2003; the Prescott dismissal order,
that August. Plaintiffs first urged application of collateral
estoppel in opposition to the motions to dismiss. In dismissing
the action at hand, the district court by implication rejected such
application. No authority need be cited for the rule that a
reviewing court will consider an issue properly presented to a
district court, even though not addressed by it.
Some opinions by our court hold review of a
collateral–estoppel decision is de novo, see, e.g., United States
v. Brackett, 113 F.3d 1396, 1398 (5th Cir.), cert. denied, 522 U.S.
7
934 (1997); others, for abuse of discretion, see, e.g., Aguillard
v. McGowen, 207 F.3d 226, 228 (5th Cir.), cert. denied, 531 U.S.
877 (2000). Because Plaintiffs’ collateral–estoppel contention
fails under either standard, we need not decide which to apply.
A judgment is preclusive in federal court if: (1) the prior
federal decision resulted in a judgment on the merits; (2) the same
fact issue was litigated in that court; and (3) the issue’s
disposition was necessary to the prior action’s outcome. Am. Home
Assur. Co. v. Chevron, USA, Inc., 400 F.3d 265, 272 (5th Cir.
2005). In addition, there must not be any special circumstances
making application of collateral estoppel unfair. Winters v.
Diamond Shamrock Chem. Co., 149 F.3d 387, 391 (5th Cir. 1998),
cert. denied, 526 U.S. 1034 (1999). Settlement agreements, like
consent judgments, are not given preclusive intent unless the
parties manifest their intent to give them such effect. Hughes v.
Santa Fe Int'l Corp., 847 F.2d 239, 241 (5th Cir. 1988). Finally,
collateral estoppel does not apply unless the facts and legal
standards used to assess those facts are the same in both
proceedings. Copeland v. Merrill Lynch & Co., 47 F.3d 1415, 1422
(5th Cir. 1995).
Concerning such legal standards, the Prescott court in part
based its motion-to–dismiss denial on the Tenth Circuit’s
permitting group pleading in PSLRA cases. Group pleading
8
in its broadest form allows unattributed
corporate statements to be charged to one or
more individual defendants based solely on
their corporate titles. Under this doctrine,
the plaintiff need not allege any facts
demonstrating an individual defendant's
participation in the particular communication
containing the misstatement or omission where
the defendants are “insiders or affiliates” of
the company.
Southland Sec. Corp. v. INSpire Ins. Solutions., Inc., 365 F.3d
353, 363 (5th Cir. 2004). Unlike the Tenth Circuit, our circuit
does not permit such pleading. Id. at 363-65.
In their reply brief, Plaintiffs concede the Prescott
plaintiffs used group pleading, which, again, is not permitted for
PSLRA actions in our circuit. In addition, denial of a motion to
dismiss is not a final judgment on the merits because the action
continues after the denial. Falcon v. Transportes Aeros de
Coahuila, S.A., 169 F.3d 309, 312 (5th Cir. 1999). In sum, the
Prescott motion–to–dismiss denial cannot be given preclusive effect
in this action.
B.
Plaintiffs next challenge the district court’s granting, in
part, Deloitte’s motion to strike the expert’s affidavit attached
to the SAC. They claim the affidavit should be considered part of
the SAC, pursuant to Federal Rule of Civil Procedure 10 (exhibit
attached to the pleading considered part of it). In any event,
9
they claim the district court erred by not considering the entire
affidavit.
Plaintiffs contend this ruling should be reviewed de novo.
Instead, we review for abuse of discretion. See Pedraza v. Jones,
71 F.3d 194, 197 (5th Cir. 1995) (discussing whether to strike an
expert’s affidavit and stating decisions to do so are reviewed for
abuse of discretion).
Attached to the SAC is an affidavit by Plaintiffs’ accounting
expert to bolster their fraud claims. Although the district court
refused to consider the expert’s conclusions (opinions), it did
consider the affidavit’s “nonconclusory, factual portions”. Fin.
Acquisition Partners, L.P. v. Blackwell, 2004 WL 2203253, at *5
(N.D. Tex. 29 Sept. 2004) (unpublished).
Plaintiffs rely on Barrie v. Intervoice-Brite, Inc., 397 F.3d
249, modified and reh’g denied, 409 F.3d 653 (5th Cir. 2005), for
the proposition that PSLRA plaintiffs can rely on expert affidavits
to defeat motions to dismiss. Barrie held dismissal of a PSLRA
action improper where the facts were in dispute. In doing so, it
noted the complaint was supported by “sworn expert analysis”. Id.
at 257. Barrie does not hold, however, that, in securities–fraud
actions, district courts must consider experts’ affidavits attached
to complaints. Apparently, the appropriateness vel non of
considering such an affidavit was not raised in Barrie. In any
event, the question was not decided by our court. E.g., Webster v.
10
Fall, 266 U.S. 507, 511 (1925) (ruling that questions neither
brought to the court’s attention nor ruled on are not precedent);
Thomas v. Tex. Dep’t of Crim. Justice, 297 F.3d 361, 370 n.11 (5th
Cir. 2002) (stating an opinion is not binding precedent for
questions not squarely before the court).
In its Rule 12(b)(6) dismissal, the district court held: the
affidavit was not a written instrument under Rule 10; and it was
not appropriate to consider the opinions in the affidavit. In
striking those parts of the affidavit, the district court cited,
and quoted from, DeMarco v. Depotech Corp., 149 F. Supp. 2d 1212,
1221 (S.D. Cal. 2001). As DeMarco noted, allowing plaintiffs to
rely on an expert’s opinion in order to state securities claims
requires a court to “confront a myriad of complex evidentiary
issues not generally capable of resolution at the pleading stage”.
Id. In addition, considering such opinions might require ruling on
the expert’s qualifications. Id. This would be inappropriate at
the pleading stage.
PSLRA complaints must allege specific facts demonstrating
material misstatements or omissions made with scienter. Even if
non-opinion portions of an expert’s affidavit constitute an
instrument pursuant to Rule 10, opinions cannot substitute for
facts under the PSLRA. Therefore, the district court did not abuse
its discretion in refusing to consider the opinions/conclusions in
the affidavit.
11
C.
Plaintiffs claim the district court erred by holding they
failed to satisfy the falsity and scienter requirements of the
PSLRA and Federal Rule of Civil Procedure 9(b) (requiring pleading
fraud claims with particularity). We review de novo a complaint’s
being dismissed under Rule 12(b)(6) for failure to state a claim.
E.g., Lowrey v. Tex. A & M Univ. Sys., 117 F.3d 242, 246 (5th Cir.
1997).
Such motions are “viewed with disfavor and ... rarely
granted”. Id. at 247 (internal quotation omitted). They should be
granted only if it is evident the plaintiff cannot prove any set of
facts entitling them to relief. E.g., Blackburn v. City of
Marshall, 42 F.3d 925, 931 (5th Cir. 1995). Along this line, all
well-pleaded facts must be viewed in the light most favorable to
the plaintiff. E.g., Spivey v. Robertson, 197 F.3d 772, 774 (5th
Cir. 1999), cert. denied, 530 U.S. 1229 (2000). On the other hand,
as noted, the plaintiff must plead specific facts, not conclusory
allegations, to avoid dismissal. E.g., Guidry v. Bank of LaPlace,
954 F.2d 278, 281 (5th Cir. 1992).
In ruling on Rule 12(b)(6) motions, district courts generally
may rely only on the complaint and its proper attachments. E.g.,
Travis v. Irby, 326 F.3d 644, 648 (5th Cir. 2003). They are
permitted, however, to rely on matters of public record. Davis v.
Bayless, 70 F.3d 367, 372 n.3 (5th Cir. 1995). Moreover, in
12
securities actions, the court may, as did the district court here,
rely on “public disclosure documents required by law to be, and
that have been, filed with the SEC, and documents that the
plaintiffs either possessed or knew about and upon which they
relied in bringing the suit”, without, pursuant to Rule 12(b),
converting the motion into one for summary judgment. E.g., Rothman
v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (internal citations
omitted).
Plaintiffs claim violations of § 10(b) of the Securities
Exchange Act of 1934 (Exchange Act), as amended by the PSLRA, 15
U.S.C. § 78u-4(b)(1). Section 10(b) makes it illegal for a person
to use or employ, in connection with the purchase or sale of any
security, any manipulative or deceptive device or contrivance in
contravention of the SEC’s rules. Rule 10b-5 makes it unlawful for
anyone to make a false statement of material fact or to omit a
material fact necessary to make the statement not misleading. 17
C.F.R. § 240.10b-5. To state a claim under § 10(b) and Rule 10b-5,
“a plaintiff must allege, in connection with the purchase or sale
of securities[:] (1) a misstatement or an omission (2) of material
fact (3) made with scienter (4) on which plaintiff relied (5) that
proximately [injured him]”. E.g., ABC Arbitrage v. Tchuruk, 291
F.3d 336, 348 (5th Cir. 2002) (internal quotation omitted).
The PSLRA “was enacted in response to an increase in
securities fraud lawsuits perceived as frivolous”. Newby v. Enron
13
Corp., 338 F.3d 467, 471 (5th Cir. 2003). It requires the
complaint to specify each allegedly misleading statement and the
reason why it is misleading; if an allegation is made on
information and belief, the complaint must also state with
particularity all facts on which the belief is formed. 15 U.S.C.
§ 78u-4(b)(1). Its pleading requirements incorporate Rule 9(b)’s
fraud–pleading standard. ABC Arbitrage, 291 F.3d at 349-50. That
Rule requires a plaintiff to specify the alleged fraudulent
statements, the speaker, when and where the statements were made,
and why they are fraudulent. Id.; see also FED. R. CIV. P. 9(b).
A district court must dismiss a securities–fraud claim failing to
satisfy either the PSLRA’s pleading requirements or those of Rule
9(b). ABC Arbitrage, 291 F.3d at 350.
As discussed, to survive a motion to dismiss a
securities–fraud action, plaintiffs must, inter alia, plead
specific facts establishing a strong inference of scienter.
Nathenson v. Zonagen, Inc., 267 F.3d 400, 407 (5th Cir. 2001).
Restated, pursuant to the PSLRA, failure to adequately plead
scienter requires dismissal of the complaint. 15 U.S.C. § 78u-
4(b)(3)(A). Scienter can be established by demonstrating the
intent to deceive, manipulate, or defraud. Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 n.12 (1976). For PSLRA purposes,
plaintiffs may establish scienter by demonstrating either intent or
severe recklessness. See Nathenson, 267 F.3d at 408 (defining
14
severe recklessness as highly unreasonable omissions or
misrepresentations demonstrating an extreme departure from
standards of ordinary care). Circumstantial evidence can support
a scienter inference. Id.
Plaintiffs fail to satisfy the PSLRA’s pleading requirements.
Accordingly, their complaint was properly dismissed.
1.
First, the district court correctly rejected group–pleading
allegations. Southland, 365 F.3d at 364-65 (holding PSLRA
abolished group–pleading doctrine). For the claimed fraud,
Plaintiffs must distinguish among defendants and allege the role of
each. Id. Corporate officers are not liable for acts solely
because they are officers, even where their day–to–day involvement
in the corporation is pleaded. Id. Corporate statements can be
tied to officers if plaintiffs allege they signed the documents on
which the statements were made or allege adequately their
involvement in creating the documents. Id.
The proscribed group–pleading involves the 10 May 2001
shareholder meeting that was the subject of the Oklahoma Prescott
litigation. Plaintiffs allege some of the Individual Defendants
made, with scienter, materially misleading statements at that
meeting by telling shareholders it was not a matter of whether
Amresco would obtain new warehouse funding, but a question of the
terms to which it would have to agree.
15
Plaintiffs fail, however, to allege which Individual Defendant
made which statement at that meeting. Therefore, the district
court held this allegation failed to tie specifically any
Individual Defendant to the statements and thus failed under the
PSLRA's heightened–pleading standard. In addition, because neither
Financial nor May attended the meeting, they cannot claim to have
relied on any of the statements made at it.
Plaintiffs provide two alternate theories under which they
contend Brown, Pettee, and Blackwell are liable for these
statements: (1) under Barrie, the primary speaker is liable for
the false statement made with scienter, and the silent witnesses
are liable for an omission; and (2) pursuant to control–person
liability under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a)
(stating anyone “who, directly or indirectly, controls any person
liable [for Exchange Act violations] shall also be liable ... to
the same extent as such controlled person”).
In Barrie, while recognizing the group–pleading ban in our
circuit under Southland, 397 F.3d at 261, plaintiff was allowed to
avoid that ban by alleging one defendant made a statement, and the
other, knowing it was false, remained silent, id. at 263.
Plaintiffs’ complaint fails under Southland and Barrie because it
only alleged a group of defendants made statements; in other words,
it did not identify which defendant(s) made a statement and who
remained silent. Moreover, to the extent Barrie might be read to
16
conflict with Southland and permit group pleading, Southland
controls. E.g., Boyd v. Puckett, 905 F.2d 895, 897 (5th Cir.)
(stating where holdings in two cases conflict, the earlier case
controls and is binding precedent), cert. denied, 498 U.S. 988
(1990).
In any event, Plaintiffs also failed to plead with specificity
reliance on those statements, that they were false or misleading
when made, or that a Defendant knew they were false or misleading.
Because Plaintiffs fail to establish primary securities–fraud
violations under § 10(b) or Rule 10b-5, they necessarily fail to
establish control–person liability. ABC Arbitrage, 291 F.3d at 362
n.123.
The district court correctly dismissed the claims relying on
group pleading. Although such pleading does not bar all of the
claims, those remaining fail to establish securities–law violations
by any Defendant. Those against the Individual Defendants are
addressed first.
2.
Plaintiffs claim: the Individual Defendants made several
material misrepresentations and omissions; and they have
control–person liability. Because the SAC fails to plead fraud
with sufficient particularity, these claims were properly
dismissed.
17
a.
Again, an Individual Defendant is not liable for an Amresco
business filing unless he either signed it or was involved in its
creation. Southland, 365 F.3d at 365. Plaintiffs provide no
specific facts either tying any of the Individual Defendants to
such filings they did not sign or demonstrating scienter for any
filings they did sign.
i.
Plaintiffs allege Amresco’s Y2000 10-K was false and
misleading because it significantly overstated assets, including
the retained interest in securitizations. They also allege
Amresco’s Y1999 10-K, “signed by Defendant Kirkland among others”,
significantly overvalued the company’s assets. As noted, Brown,
Pettee, and Kirkland signed the Y2000 10-K. Plaintiffs contend it
used improper discount rates for Amresco’s loans and underestimated
the past-due rate of loans within Amresco’s conventional lending
portfolio.
The facts Plaintiffs use to support their claims were
disclosed, however, in the Y2000 10-K. For example, as the
district court noted, Amresco disclosed that a different discount
rate might have a material effect on the estimated fair–value
amounts. Essentially, as the court also stated, what Amresco
warned might happen, did indeed happen.
18
Amresco’s financial statements explained outside investors
absorbed the first 5 to 10% of losses from Amresco’s loans. Thus,
as the district court stated, it was reasonable to assume a loss
rate of 0% for those loans. Plaintiffs fail to plead facts
supporting an allegation that any Defendant knew the value of
Amresco’s assets was overstated, or that it was fraudulent in using
its discount rate or credit–loss assumption.
ii.
Plaintiffs also claim the Individual Defendants fraudulently
omitted from SEC filings any mention of the $50 million Duke & Long
loan (and that Deloitte permitted them to do so), which Amresco had
to write down after Duke & Long’s parent company filed for
bankruptcy. But Plaintiffs allege nothing suggesting the
Individual Defendants acted fraudulently in this transaction, and
the SAC does not adequately discuss any of the loan’s details, such
as how it was treated in bankruptcy or how it affected Amresco.
Plaintiffs allege only that one of the Individual Defendants
discussed the implosion of a $50 million loan.
Mere conclusory statements are insufficient to defeat
dismissal under the PSLRA’s heightened–pleading requirements. See
ABC Arbitrage, 291 F.3d at 348. Because Plaintiffs fail to allege
with specificity any details regarding the Duke & Long loan, the
allegation does not satisfy that requirement.
19
iii.
Another insufficient allegation involves Amresco’s retention
of a restructuring specialist. Greenhill & Co. was retained on 12
March 2001 to help Amresco pursue any recapitalization or
restructuring.
Plaintiffs contend the Individual Defendants made a material
omission by failing to disclose that retention. They claim
retaining Greenhill demonstrates statements about Amresco’s
recovery plan were fraudulent. They base this partially on
Amresco’s having previously heard a presentation from Wasserstein
Perella & Company, dedicated solely to pursuing bankruptcy.
First, the district court could not have considered any
contention regarding Amresco’s dealings with Wasserstein because
the SAC does not mention any restructuring firm other than
Greenhill. Needless to say, in reviewing a Rule 12(b)(6)
dismissal, we review only the well-pleaded facts in the complaint.
This new allegation may not be considered. The claim otherwise
fails.
iv.
Plaintiffs also allege the Individual Defendants failed to
timely disclose a material executive–compensation plan (adopted in
April 2000), with bonuses potentially worth more than Amresco’s
market capitalization. Plaintiffs fail, however, to demonstrate
which Defendant(s) had the duty to disclose this plan, including
20
when. They also fail to plead any facts supporting their claim as
to the plan’s value. Moreover, with one possible exception (30
March 2001 purchase), Financial purchased its shares after Amresco
disclosed the plan (in the Y2000 10-K, signed on the day of the
first purchase (30 March) and filed on 2 April). Therefore, it
cannot claim it would not have done so had it known about the plan.
b.
Finally, Plaintiffs fail to adequately plead scienter for any
Individual Defendant because the SAC makes only general allegations
and conclusory statements, such as stating they knew, or were
reckless in failing to disclose, adverse material. See ABC
Arbitrage, 291 F.3d at 348. Along this line, Plaintiffs’ mere
allegation that the Individual Defendants were motivated by a
desire to retain their jobs does not satisfy the scienter
requirement. See Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir.
1994) (holding scienter required for fraud claim not established
merely by alleging defendants were motivated by job–retention
goal).
Because Plaintiffs fail to plead material misstatements or
omissions, as well as scienter, the claims against the Individual
Defendants were properly dismissed. Those against Deloitte follow.
3.
Plaintiffs allege Deloitte misled the public to believe
Amresco’s financial statements accorded with Generally Accepted
21
Accounting Principles and Generally Accepted Accounting Standards.
The expert’s affidavit primarily addressed these allegations.
a.
As noted, Plaintiffs contest some of Amresco’s assumptions for
valuing its retained interests in the securitized loans, including
the credit–risk rate of 0%. Amresco explained why it chose that
rate. It also noted delinquencies in excess of 5 to 10% would
likely result in additional write-downs. In fact, as the district
court stated, Amresco provided those explanations in the same
document, the Y2000 10-K, that stated the assumptions. Plaintiffs
do not allege facts suggesting Amresco failed to use the best
available estimates to choose its discount rates, as required by
the Financial Accounting Standards Board (FASB). The SAC makes
only a conclusory allegation that Amresco failed to follow FASB
regulations. In any event, failure to follow accounting standards,
without more, does not establish scienter; this claim fails. See
Fine v. Am. Solar King Corp., 919 F.2d 290, 297 (5th Cir. 1990),
cert. dismissed, 502 U.S. 976 (1991).
b.
Plaintiffs also allege Deloitte improperly failed to issue a
going–concern qualification in the light of Amresco’s dire
financial situation. The American Institute of Certified Public
Accountants Code of Professional Standards § 341.06 (AU) requires
that qualification if one of the following conditions exist: (1)
22
negative trends, such as recurring operating losses; (2) other
indications of potential financial difficulties, such as the need
to seek new sources of outside funding; (3) internal matters; and
(4) external matters, such as legal issues that might jeopardize
the company’s ability to operate.
Although Plaintiffs’ expert opined no reasonable auditor in
Deloitte’s position would have failed to issue the qualification,
the district court properly refused to consider that opinion. Even
without it, however, for Rule 12(b)(6) purposes, at least two of
the above four factors existed: recurring losses and the need to
obtain new financing.
Nevertheless, Plaintiffs did not plead sufficiently
particularized facts demonstrating Deloitte was, inter alia,
severely reckless in failing to issue the qualification, as
required to sufficiently plead with particularity under the PSLRA.
See Nathenson, 267 F.3d at 408. The AU requires an auditor to
issue the qualification only if there is substantial doubt the
entity will continue, and only after determining the company’s plan
to deal with its problems would be ineffective. Again, Plaintiffs
plead no facts demonstrating Deloitte was severely reckless in this
regard.
Plaintiffs never pleaded with specificity how, or why,
Deloitte was unreasonable in failing to determine Amresco did not
have a reasonable turnaround plan. In addition, as the district
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court stated, general allegations that Deloitte was somehow
involved in the Duke & Long loan do not establish Deloitte’s
liability, just as the allegations fail to establish liability for
the Individual Defendants.
D.
Finally, Plaintiffs maintain that, even if their SAC was
properly dismissed, they should have been granted leave to amend
(to permit a fourth try). The district court did not abuse its
discretion in not permitting another amended complaint.
Leave to amend should be freely granted when justice requires.
FED. R. CIV. P. 15(a). District courts, however, have discretion to
manage their docket. Schiller v. Physicians Res. Group, Inc., 342
F.3d 563, 566 (5th Cir. 2003) (holding no abuse of discretion after
plaintiff had three opportunities to correct any deficiencies in
its complaint). Accordingly, although a district court’s
discretion to deny leave to amend is limited, leave to amend is not
automatic. Goldstein v. MCI Worldcom, 340 F.3d 238, 254-55 (5th
Cir. 2003) (holding no abuse of discretion where plaintiffs failed
multiple times to correct deficiencies in complaint, and failed to
show court how they would correct them in a future filing).
Nevertheless, there is a strong presumption in favor of granting
leave to amend; to this end, a district court may be reversed for
failing to provide an adequate explanation for denying it. Mayeaux
24
v. La. Health Serv. & Indem. Co., 376 F.3d 420, 426 (5th Cir.
2004).
Plaintiffs’ leave–to–amend request appeared only in the
conclusion of their response in opposition to the motions to
dismiss (opposition). After urging denial of those motions,
Plaintiffs stated: “In the alternative Plaintiffs request leave to
amend to allege the additional facts asserted herein as well as
additional facts they may discover through investigation”.
(Emphasis added.) (Along this line, Plaintiffs’ opposition had
earlier presented (improperly) facts not in the SAC, such as: (1)
emails and an internal company memorandum questioning Amresco’s
underwriting policies; (2) Amresco’s discussions with the
Wasserstein restructuring firm; and (3) an allegation Deloitte
provided the appraisals for the properties in Amresco’s loan
portfolio.)
In its opinion dismissing the complaint, in denying the
cursory leave–to–amend request, the district court stated only that
Plaintiffs failed to demonstrate “extraordinary circumstances”
warranting leave to amend. Fin. Acquisition Partners, L.P., 2004
WL 2203253, at *24. This language tracked the court’s earlier-
discussed caution in permitting filing the SAC. Plaintiffs urge
such “extraordinary circumstances” language demonstrates the court
used the wrong legal standard in denying leave to amend yet again.
We disagree.
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Although the court could have avoided confusion by employing
different language in denying leave to amend, nothing in the record
demonstrates it acted inflexibly. Plaintiffs had three attempts to
produce a sufficient complaint. The court dismissed the complaint
and denied leave to amend only after the third insufficient
attempt.
In seeking to avoid dismissal, Plaintiffs’ opposition employed
facts claimed unavailable when filing the SAC. Although they had
three prior opportunities to produce this information, and although
they claimed the facts were previously unavailable and that others
might become known, Plaintiffs did not explain why they were unable
to obtain the information before filing the SAC. In other words,
they never explained this to the district court as a basis for
being allowed leave to file a fourth complaint. In short,
Plaintiffs never provided the requisite specificity for leave to
file a fourth complaint. Goldstein, 340 F.3d at 254-55. Moreover,
none of the “previously unavailable” facts improperly included in
the opposition sufficiently pleaded scienter. There was no abuse
of discretion. See ABC Arbitrage, 291 F.3d at 362 (holding no
“abuse of discretion to deny ... a third chance to offer more
details”).
III.
For the foregoing reasons, the judgment is
AFFIRMED.
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